1 HK01 snipes at Xi in calling for ‘a new round of reform and opening up’
Nov. 27 to Nov. 30
HK01, an online Hong Kong media outlet, published a series of commentary articles on the theme of “setting forth again with reform” (改革再出發) that “look forward” (盼望) to the convening of the Third Plenum of the 20th Party Congress and a “new round of reform and opening up.”
Some headlines of the commentaries include:
- “The Third Plenum of the 20th Central Committee Has Not Yet Been Held; Major Reform Measures and Personnel Matters Could be Undertaken at the Meeting” (中共三中全會遲遲未開 或涉重大改革舉措和人事)
- “Why Was the Third Plenum of the 18th Central Committee ‘Epoch-making?’” (為什麼十八屆三中全會是「劃時代的」?)
- “The Third Plenum of the 20th Central Committee is Expected to Accelerate Comprehensive Opening Up; Building Consensus is Urgent” (三中全會料加速全面開放 凝聚共識迫在眉睫)
- “When Will the Third Plenum of the 20th Central Committee be Held; Looking Forward to China’s New Round of Reform and Opening Up”
Some noteworthy points brought up in the series of commentaries include:
- The removal of purged foreign minister Qin Gang, defense minister Li Shangfu, PLA Rocket Force commander Li Yuchao, and PLARF political commissar Xu Zhongbo from the 20th Central Committee could be made official at the Third Plenum.
- In view of past practices since Deng Xiaoping launched “reform and opening up,” the most likely theme of the Third Plenum should be reform, development, and other major issues. Specifically, the Third Plenum could deliberate comprehensively deepening reform, reform and opening up, economic development, and Chinese-style modernization.
- The commentaries repeatedly touted the importance of the 18th Central Committee’s decision on some major issues concerning comprehensively deepening reform (中共中央關於全面深化改革若干重大問題的決定) that was passed at the Third Plenum in 2013 in what appeared to be an attempt to create the impression that the Third Plenum of the 20th Central Committee would build on the spirit of that decision in further advancing comprehensive “reform and opening up.”
- In mentioning the three pandemic years, the commentaries implied that “zero-COVID” was a “left-leaning” policy that shook the Party’s “basic consensus” (i.e. focus on “economic development,” not Maoist “class struggle,” and “hide strength, bide time” in Sino-U.S. relations) since the launch of “reform and opening up.”
- One of the commentaries noted, “In recent years, China has been facing a complex situation both internally and externally. The overlapping impacts of declining economic growth, serious class division, the three COVID-19 years, and Sino-U.S. competition have caused a large number of enterprises and the public to lack confidence and be full of doubts about the future.” The commentary added that many now expect China to “declare its determination” and rally the people through a new round of “reform and opening up.”
- One of the commentaries noted that Deng Xiaoping did not have it easy when carrying out “reform and opening up,” and that the Party had encountered leftist resistance and wavered in pursuing the policy. The commentary expressed hope that the Third Plenum of the 20th Central Committee, like the Third Plenum of the 11th Central Committee in 1978, would break away from the “incorrect line” of long-term “leftism” and once again “emancipate the mind, seek truth from facts, and move the Party forward in unity” (解放思想, 實事求是, 團結一致向前看). The commentary added that there is a “long way to go” in further “emancipating the mind and moving the Party forward in unity” because today’s China is different from the Deng era where the PRC “hid strength and bided time” (韜光養晦), “made a fortune while keeping a low profile” (悶聲發大財), and had a “certain amount of room for trial and error.” Also, the internal and external challenges facing China today determine that “more precise policies are needed” and that the “governance system and governance capabilities need to be more modernized” so that the CCP can “regain social consensus” and push China to the next level.
- The commentaries quoted repeatedly from Caixin’s Nov. 6, 2023 editorial titled “Reform Urgently Needs New Breakthroughs” (改革亟須新突破).
Background
1. HK01 is owned by Yu Pun-hoi, the former owner of the former Beijing-based overseas Chinese language media outlet Duowei News. Duowei was widely regarded as being part of the CCP’s “Great External Propaganda Plan” (大外宣) network.
We previously analyzed that HK01 appeared to have “inherited” Duowei’s role as a “channel for Xi Jinping’s opposition to vent their dissatisfaction with his rule and conduct political mobilization” after the latter ceased operations and was folded into HK01 in April 2022. Before it was shut down, Duowei would occasionally carry messaging that appeared to stem from various interest groups in the CCP elite (including the Jiang Zemin faction) and frequently publish articles that were very critical of Xi and his policies.
2. In the lead-up to the 20th Party Congress in 2022, HK01 published a series of articles praising Deng Xiaoping and the “collective leadership” system while obliquely criticizing the Xi leadership’s flaws and failures during its decade in charge. Those articles also indirectly criticized Xi’s “deepening reform and opening up” as being a rejection of Deng’s “reform and opening up.”
3. After Li Keqiang passed away, HK01 published an exclusive interview with Li Shan, a Hong Kong member of the National Committee of the Chinese People’s Political Consultative Conference and one of the founders of the pro-Beijing Bauhinia Party, under the headline “The Best Way to Mourn Li Keqiang is to Persist in Reform and Opening Up” (悼念李克強 最好方式就是堅持改革開放).
4. The CCP authorities have not announced whether the 20th Central Committee will be holding its Third Plenum and when it will be held.
Our take
As we analyzed in numerous past newsletters, Xi Jinping is focused on consolidating power to an even greater degree and carrying out “rectification” work as he looks to strengthen his control over China in a bid to better extricate the CCP regime from its existential crises. Unless Xi believes that his grip on power is absolute and his factional enemies or elite interest groups no longer pose a threat to the regime, he is unlikely to pursue liberal reforms lest they undermine his “quan wei” (authority and prestige) and create openings for the “anti-Xi coalition” to challenge his rule.
Xi’s current political focus, coupled with HK01’s political background, indicates that the political force behind HK01’s series of commentary articles on the theme of “setting forth again with reform” is more likely the “anti-Xi coalition” and not the Xi leadership floating “trial balloons” about advancing reform at the Third Plenum of the 20th Central Committee when it is eventually held. The “anti-Xi” angle in the commentaries also leaves little doubt about the factional alignment of those behind the series.
The “anti-Xi coalition” has several reasons for championing Deng’s “reform and opening up” and obliquely putting down Xi Jinping.
First, many of Xi’s opponents, and especially those in the Party elite, benefited greatly from Deng’s trademark policy. By urging Xi to continue with and expand on “reform and opening up,” the “anti-Xi coalition” is indirectly signaling that they want to stick with “the way things were” under Xi’s predecessors from Deng onwards to preserve their interests. In contrast, their interests would be hurt even more if the Xi leadership continues to step up the prevention and control of financial risks, elevate the real economy over the “financialized” economy, and have finance serve the CCP’s “socialist construction” instead of enriching the elite even more.
Second, the “anti-Xi coalition” is terrified that Xi would sacrifice them, seize more of their assets, and break up their “independent kingdoms” in the regime as he seeks to absolve himself of blame for the many failures of the CCP regime and win over the masses. Therefore, the HK01 commentaries frame the Xi leadership’s measures as “left-leaning” and “leftism” to evoke the Mao era and have Xi become a “reminder” of the horrors of one-man rule in the eyes of the popular opposition in China. Missing from the commentaries, however, is a reflection on how the Party elites and other interest groups took advantage of “reform and opening up” during the Jiang faction’s era of dominance (1997 to 2012) in particular to line their pockets, widen the rich-poor divide in Chinese society and worsen social frictions, and lay the foundation for the regime’s many existential crises today. Meanwhile, the “benefits” of “reform and opening up” mentioned in the HK01 commentaries were mainly reaped by the Party and business elites with vested interests.
Third, the “anti-Xi coalition” is concerned that Xi Jinping’s “leftist” policies are threatening their personal safety, eroding the Party’s political legitimacy, and ultimately endangering the survival of the CCP regime. These concerns, which are all valid, are indirectly hinted at in the HK01 commentaries and more explicitly mentioned in the “Objective Evaluation of Xi Jinping” article published in January 2022.
What’s next
The “anti-Xi coalition’s” attempt to dissuade Xi Jinping from walking his present path is unlikely to move the political needle. Instead, the political mobilization in the pages of HK01 could sway the Xi leadership to move in on the “anti-Xi coalition” sooner rather than later. The resulting escalation of factional struggle could lead to economic, social, or political Black Swans and further imperil the CCP regime.
2 Beijing’s troubles deepen as foreign investors account for risks in China
Foreign investors grow pessimistic about China
Nov. 17
Peterson Institute for International Economics senior researcher Nicholas Lardy wrote in a piece that new PRC data implied that “foreign firms operating in China are not only declining to reinvest their earnings but—for the first time ever—they are large net sellers of their existing investments to Chinese companies and repatriating the funds.”
Lardy wrote that outflows “exceeded $100 billion in the first three quarters of 2023 and are likely to grow further based on trends to date.” He added that investment selloffs are “contributing to downward pressure on the value of the Chinese currency and, if sustained, will modestly reduce China’s potential growth.”
Nov. 27
Reuters reported that foreign investors have been souring on China for most of 2023 and the data released in November “has provided clear evidence of the negative impact de-risking strategies” are having on the Chinese economy.
Nov. 28
1. Goldman Sachs CEO David Solomon told the Financial Times at the Global Banking Summit that his bank has moved away from a “growth at all costs” strategy towards China.
Compared to five years ago, “today, it’s a more conservative approach [in China] and we’ve probably pared back some of our financial resources there, simply because there’s more uncertainty,” he said.
2. Partners Group Holding AG co-founder Urs Wietlisbach told Bloomberg News in an interview that his company has not done a transaction in China in two years. “We are more careful. A Chinese deal today just needs to bring a much higher expected return because you take much more risk,” he said.
Wietlisbach also said, “We told our companies ‘make sure that you’re not too dependent on China.’ If you have 40 percent of your product delivered from China, you have to be careful.”
Wietlisbach further observed that geopolitical tensions have been rising in recent years, and the pitting of China, Russia, and others against the U.S. and Europe amounts almost to a cold war. “This definitely has never been as severe as it is today,” he said.
Nov. 29
1. JPMorgan Chase CEO Jamie Dimon said in a discussion at the DealBook Summit about a potential conflict over Taiwan that “if the American government makes me leave China, I’m leaving China.” He added, “If there’s a war in Taiwan, you would take all bets off.”
2. Reuters reported that Walmart is importing more goods to the U.S. from India and cutting its reliance on China. The media outlet cited data from Import Yeti as showing that Walmart shipped 25 percent of its U.S. imports from India between January and August 2023, compared with 60 percent of its shipments from China over the same period (down from 80 percent in 2018).
Nov. 30
1. The Wall Street Journal reported that geopolitical risks are “now a top consideration for buyers of Chinese stocks, bonds and stakes in private companies—and are turning many people off investing in China.”
The Journal cited data from Wind Information as showing that international investors have pulled out about more than $24 billion from China A shares since August 2023 via the Hong Kong trading link, or the largest and most sustained net outflow of foreign funds through the link since it was established in 2014. The Journal also noted that the MSCI China Index has lost 10 percent so far in 2023, putting it on track for a third consecutive year of declines.
The Journal added that market strategists at some major Wall Street banks said that “most of the hedge funds and active-fund managers that have sold off their China stockholdings are unlikely to return until there are significant improvements in the country’s growth outlook and U.S.-China relations.”
2. Daniel Zipser, leader of McKinsey’s Asia consumer and retail practice, told CNBC that “there are no signs it should be a strong, V-shaped recovery” in China.
“The overall economic recovery and the recovery of the property market has not been what people hoped for. People are aware of the geopolitical tensions, very aware of … exports declining. They don’t yet have the confidence this will be different [in] 2024, 2025,” he said.
Alibaba shares dip on Morgan Stanley downgrade while PDD goes up
Dec. 1
Morgan Stanley analysts downgraded Alibaba from “overweight” to “equal-weight” over concerns about softness in the latter’s customer management revenue and cloud business in light of lackluster economic recovery in China. They also noted uncertainties with Alibaba’s decision to cancel its cloud business spin-off.
Meanwhile, Morgan Stanley named PDD Holdings (Pinduoduo) as its top pick in the sector because it is best placed to navigate China’s present economic environment with its heavy discounting steps.
Morgan Stanley’s downgrade of Alibaba shares saw the company’s stock fall 3.2 percent to $72.5 on Dec. 1. This meant that Alibaba’s shares, which are down about 18 percent thus far in 2023, are set for a third consecutive year of losses. Meanwhile, PDD’s shares closed on Nov. 30 with a market capitalization of nearly $196 billion, or more than Alibaba’s market value of $190.45 billion.
Our take
1. International investors are becoming more cautious about risks in China partly due to rising geopolitical tensions and the PRC’s poor economic data.
Recent economic data continues to paint a bleak picture:
a) According to PRC National Bureau of Statistics data published on Nov. 27 and Nov. 30:
- Profits of China’s industrial enterprises above designated size decreased by 7.8 percent year-on-year during the January-October period to 6.11542 trillion yuan. This indicates that the Chinese economy is performing worse this year as compared to 2022 when the “zero-COVID” policy was in place.
- China’s manufacturing purchasing managers’ index (PMI) fell 0.1 from a month ago to 49.4. This was worse than the median forecast of 49.7 per a Reuters poll and suggests that the PRC authorities’ efforts to spur recovery in the third quarter of the year were lacking in effectiveness.
b) A comparison of data from the People’s Bank of China on the sources and uses of credit funds of financial institutions (in renminbi) in October 2023 and October 2022 showed that business activity in China is dramatically shrinking (hinting at a lack of investments and expansions, as well as increased bankruptcy):
Loans
- Loans to non-financial enterprises and government departments and organizations increased by 18.34 trillion yuan from a year ago.
- Loans to residents were up by 5.09 trillion yuan from a year ago.
- Loans to non-banking financial institutions increased by 222.3 billion yuan from a year ago.
- In total, the loans listed above were up by 23.65 trillion yuan from a year ago.
Deposits
- Deposits of non-financial enterprises increased by 3.83 trillion yuan from the previous year, of which demand deposits decreased by 759.8 billion yuan and time and other deposits increased by 4.59 trillion yuan.
- Deposits of households increased by 18.9 trillion yuan from the previous year, of which demand deposits decreased by 2.28 trillion yuan and time and other deposits increased by 16.63 trillion yuan.
- Deposits of government departments and organizations increased by 2.46 trillion yuan from the previous year.
- Deposits of non-banking financial institutions increased by 806.9 billion.
- In total, the deposits listed above increased by 26 trillion yuan from the previous year.
Demand deposits of non-financial enterprises are usually used for corporate investments, purchasing material for production, and paying employee salaries, and hence are more representative of the true level of economic activity. Meanwhile, corporate time deposits represent accumulation and do not reflect current economic activity. Therefore, the significant drop in current demand deposits and the increase in time deposits indicate a sharp reduction in the operating activities of enterprises.
Enterprises and institutions received a large amount of new loans, but those loans were not converted into demand deposits and used for business activities. Instead, the loans appeared to have been transferred to households or were partly used for loan repayment or investment in financial products. Meanwhile, households converted these loans into time deposits. This development led to an increasing reduced growth rate of narrow money (M1, or cash in circulation plus demand deposits in commercial banks) from 5.8 percent in October 2022 to 1.9 in October 2023, while the growth rate of broad money (M2, or narrow money plus time deposits in commercial banks) was maintained at over 10 percent.
Put another way, the bulk of the 16.19 trillion yuan in loans to enterprises and institutions issued between November 2022 and October 2023 were not invested in furthering business operation activities and producing turnover, but were converted into time deposits in banks and placed increasing pressure on banks to generate profits through lending. Yet the banks are having difficulties in finding qualified lenders in the current economic climate where enterprises are shrinking their business activities to cope with the downturn.
2. Morgan Stanley’s downgrading of Alibaba stock and Pinduoduo overtaking Alibaba in market value reflects the sharply shrinking demand in China as well as the reduced spending power of most Chinese.
Alibaba’s decline also indirectly reflects the declining fortunes of businesses and elite interests that gained prominence through monopolistic practices and other means during the Jiang faction’s era of dominance. Political risks in China are on the rise as old CCP factional elements and their “white gloves” are targeted by the Xi leadership and foreign enterprises have to re-establish their business and power networks. As we have long observed, all issues in China are downstream from CCP elite politics, and the core problem of CCP elite politics is factional struggle.
3. The growing pessimism of international investors and companies towards China and its economic prospects indicates that the CCP’s propaganda about China’s “economic growth miracle” and so-called “super-large scale market” is no longer finding purchase. As the Chinese economy continues to deteriorate rapidly and Sino-U.S. tensions are maintained or escalate, the PRC’s “economic shield” would become increasingly less effective in protecting the regime from external pressures.
The current situation facing the CCP regime could be why Beijing has yet to announce (at least at the time this newsletter is published) a date for the Third Plenum of the 20th Central Committee. The Xi leadership likely needs to re-evaluate the regime’s commitment to “development” and “security” to see if it is possible to strike a balance between attracting foreign investments and strengthening the Party’s control over society as it formulates future economic and reform plans.
Based on our long-term research into the CCP, we believe that the Xi leadership will not be able to devise effective measures to resolve the contradiction between advancing “development” and pursuing “security,” and especially not if he continues to work within the confines of the Party and its traditions. If anything, Beijing will ultimately tend towards “security” over “development” in a crisis as the CCP authoritarian dictatorship favors tightening controls to keep society in check and avoid social instability.
Businesses and investors should recognize that the CCP is the biggest stumbling block to China’s economic development, and their political risks in China will keep increasing so long as the CCP authoritarian dictatorship remains in place while crises continue to mount for the regime.
